U.K. Inflation Posts a Temporary Slowdown on Its Way to 4%
(Bloomberg) -- U.K. inflation eased in July in what is widely seen as a blip on its way to double the Bank of England’s target this year.
Consumer prices fell back to the 2% goal for the first time since April, easing from a 2.5% increase in June, the Office for National Statistics said Wednesday. It’s the first time in four months that inflation rose less than economists had expected.
The slowdown partly reflects a sharp rise in prices in July last year, when some of the restrictions deployed during the first coronavirus lockdown were eased. With the economy mostly reopen except for overseas travel, inflation is expected to accelerate quickly, driven largely by the cost of energy and shortages of both goods and labor. The Bank of England plans to reduce its stimulus to ease pressure on prices.
“We expect inflation to accelerate further during the rest of this year, rising significantly above the Bank of England’s 2% target, as supply chains remain under strain faced with a strong rebound in demand,” said Yael Selfin, chief economist at KPMG UK.
Clothing and footwear prices fell during the summer sale season, which along with a variety of recreational goods and services made the largest downward contributions prices. Fuel prices reached the highest since September 2013.
That was partly offset by an increase in the cost of used cars, which fell a year ago. About 0.2 points of the easing in inflation were due to base effects from last year.
“The differing patterns of movement restrictions across the last two years have affected headline inflation,” said Jonathan Athow, deputy national statistician at the ONS. “Some of this month’s fall came from products and services, such as foreign travel, where real prices were used last year but have had to be imputed this year.”
Manufacturers felt stronger-than-expected inflation both in the cost of raw materials and for goods leaving factory gates. Input prices rose 9.9% from a year ago in July. That’s more than the 9.7% pace of the previous month, which was revised higher. Output costs rose 4.9%, the highest since December 2011 and more than economists had forecast.
What Bloomberg Economics Says ...
“The unexpectedly sharp slowdown in inflation for July provides a glimpse at how quickly price gains could fall once the distortions from the pandemic have passed. We expect inflation to fall from a peak of around 4% at the end of this year to 2% by the end of 2022.”
--Dan Hanson, Bloomberg Economics. Click for the full REACT.
July’s retail price index, which is usually used to set rail fares starting in the following January, stood at 3.8%. That’s more than double the rate of a year earlier. A higher RPI also is driving up the cost of government debt, a big portion of which is linked to the index.
“Prices in some areas are still sharply higher and bottlenecks in global supply chains are likely to continue to muddy the picture for inflation for many months,” said Ed Monk, associate director at Fidelity International.
The Bank of England predicts price growth of 3% in August and more than 4% in the final two months of the year. Economists surveyed by Bloomberg are less pessimistic, seeing a peak of 3.6% in the first quarter of next year.
The pickup is set to be driven by global increases in energy and goods prices, mirroring the U.S. where annual inflation is running at over 5%. Crucially, BOE policy makers say the surge is likely to be short lived, though they warn that the strength of economic recovery means some withdrawal of monetary stimulus will be needed to return inflation to target over the next two years.
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